On Wednesday, in a widely anticipated, but also highly expected move, the U.S. Federal Reserve raised the Federal Funds rate by 0.75%, up to 3.00%. However, what was not expected was the Federal Reserve’s hawkish signal on the future trajectory of rates. Per the Federal Reserve’s dot plot, which is their estimations of where rates will be on a going-forward basis, the median terminal rate anticipated came in well above expectations at 4.60% sometime between March-May 2023.
Immediately following the release, equity markets tumbled after being up roughly +0.50% on the day and yields spiked. However, during his press conference, investors found their Reverse Uno card, with the equity market rallying to up +0.80% on the day. With the last laugh however, the market played its same card, and as of this publishing, the market is now back down -0.70% on the day. However, after immediately spiking, yields on the 5-year U.S. Treasury and further out on the curve began to move lower. Perhaps this is a sign that investors can finally see a light at the end of the tunnel or perhaps had gotten too far ahead of the Federal Reserve’s intentions. In either case, the yield curve remains significantly inverted spelling an almost certain recession is upon, regardless of how it is defined.